Universal Life Insurance Policies

Since most American residents have life insurance policies in place before they move to Canada, it is important for us to review such policies prior to departure to confirm that they reflect our clients’ desired beneficiaries and to ensure that they will not create any cross-border tax traps.

One of the most common cross-border tax traps associated with life insurance policies is that certain American whole life and universal life policies may not be tax-exempt in Canada as they are in the US. This discrepancy can trigger a tax liability in Canada, but not in the US.

A similar issue arises when Americans living in Canada purchase Canadian whole life or universal life insurance policies that are not considered tax-exempt by the IRS though they are tax-exempt in the eyes of the CRA. Moreover, Canadian whole life and universal life insurance policies may trigger the egregious Passive Foreign Investment Company (“PFIC”) rules.

We advise our clients on the potential tax liability of their life insurance policies, and we suggest tax-advantageous ways of surrendering policies prior to moving north, if necessary.

We also advise US persons on the tax filing requirements associated with owning Canadian policies, particularly the requirements of the Foreign Account Tax Compliance Act (“FATCA”), which is the legislation that governs US persons’ reporting requirements for foreign accounts and other financial assets located outside the US.

Life insurance policies also pose potential US estate tax liabilities. There are estate planning solutions that can mitigate tax exposure, however, such as the irrevocable life insurance trust (ILIT).